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How America's Fishing Councils Balance Investors with Players and Prices

APF Fellow

Busty Brancaleone, who fishes out of Cape Cod, has been caught between the old fishing permit system and today's catch share quotas. Brancaleone must still pay off $100,000 he borrowed for permits that are now useless.

The fishermen in the room are standing. More prone to long hours on their feet than sitting, they stick out at these meetings, rising after a few hours, hovering behind chairs.

This is the North Pacific Fishery Management Council. One of eight regional councils that manage fisheries for the National Oceanic and Atmospheric Administration, it’s a mix of bureaucrats, scientists and seafood industry players. They set the rules for fishing the most death-defying and lucrative waters in the United States.

The council does its job in sprawling, epic meetings that can last a week. The marathon displays of democracy are held in roving locations, mostly in hotels from Seattle to Anchorage but in farther flung places too, like Nome, Alaska, places from which fishermen in the North Pacific hail.

These councils are, in a way, the fishermen’s Congress.

Second perhaps to the fish, they are most vital to fishermen’s livelihood and – though most people don’t know it – to the public’s access to affordable seafood.

These chief regulators of ocean spoils set the rules about who can fish, when, where, how much, and where that fish is sold. And since the enactment of a federal policy by the Obama Administration in 2010, the councils must also distribute the ballooning wealth of American fisheries among an expanding cast of characters in the seafood industry, one that includes more investors and lenders than ever.

Unlike days past when fishing was restricted by date, the new policy, referred to as catch shares, caps the number of fish that can be caught, then doles those harvest rights out as a secure privilege, called a quota. Quota can be fished at any time. So those longer seasons steady the supply of fresh fish to consumers, and that, in turn, boosts product values. It also makes fishing supremely less dangerous and, it is hoped, will also make it more environmentally sustainable.

It’s an economic solution at heart: when species are overfished, too many boats lead to not enough seafood, and when no one catches anything, industry profits fall. But “economics can only do a portion of it,” said Hirotsugu Uchida, an assistant professor at the University of Rhode Island who specializes in marine resource management. He said any economic recommendation has to be implemented with respect for local customs and culture. “After all, it is the actual people who will be affected and will be taking part in this whole thing.”

For the councils, that’s where management gets dicey. Unless they govern well, they risk handing the food supply to a growing number of speculators whose interest in seafood has more to do with profits than with delivering food from America’s oceans to the public at a price they can afford.

Here’s why: Once a fishery is made into a catch share, the quota is as freshly valuable as newly printed money. And once the government hands the quota out – it is typically given away to those with a history in fishing at the outset – it performs much like real estate. It’s bought and sold and traded to the next highest bidder. Over time it can become prohibitively expensive for newcomers. Those newcomers become renters. Fishermen either age into becoming landlords, or they sell to investors who can give them a premium price, but who, in some cases, don’t actually fish. These people look more like property managers than fishermen. They extract fees and rents from those who fish, and in some cases, the highest “rent” – as in king crab – is 80 percent of the catch.

Meeting social concern
In the North Pacific, the industry that dominates the million square miles of ocean surrounding Alaska is small in terms of community – like a mid-sized city – but enormous in dollars and cents, worth $726 million in catch share programs alone in 2008, the last time anybody checked.

The North Pacific council – though not without its flaws and failings – still makes a vigorous effort to make sure fishermen with small boats, most from fishing communities around Alaska, have a place in the industry. To do that, the council sets different rules based on vessel size, makes quota owners actually ride on their boats in some cases, and also makes quota buyers prove they have a history in the industry, all rules that block investors looking for a quick return.

Jeff Osborn, a former commercial fishermen who now brokers fishing assets at Dock Street Brokers in Seattle, including quota, says he does get calls from investors looking for a way into North Pacific fisheries. “I’ve had them call and when they figure out what they’re dealing with they back away,” he said, pointing to the complex rules and also a requirement to put quota in one individual’s name, a rule that trips up partnership inquiries.

Dan Hull, one of few commercial fishermen serving on the council, says investors and people in suits (representing the industry’s biggest money) have been a presence since he first became involved with the council 10 years ago. From the U-shaped table ringed with council members, stacked with documents and nameplates, Hull says he has learned to spot the different players out in the audience of stiff hotel chairs.

He knows the lobbyists, the ones that are there to stump for paid-for objectives, and the ones that serve particular industries or fishing groups – people who had to sort their own internal politics before coming to meetings. He knows the fishermen – he is one of them. He knows the seafood processing companies. And he says he tries to read every letter the council receives, the ones sent by people who can’t afford to attend.

As catch shares are increasingly in play — half of them added in the last decade of North Pacific fishing — Hull says the job of balancing the distribution of wealth has not been overlooked. While the council sets the rules on everything from crab to halibut to pollock, fare for white tablecloths to frozen fish sticks, “I don’t see a trend towards just ignoring consolidation and ignoring social consequences and economic consequences for individuals and small communities,” he said.

His concern isn’t unique for a North Pacific council member. But it is sometimes rare.

Letting the market take control
Fishermen involved with the nation’s oldest catch share have a different story to tell. Located on the other side of the continent, they live with a 23-year-old policy that sets law on surf clams and ocean quahogs. A tough, meaty clam that’s barely edible without boiling, the surf clam is best known as the secret ingredient in virtually every can of clams and clam chowder in America, and every plate of clam strips.

Despite that, no one knows who owns this fishery. And outcomes for surf clam illustrate how catch shares left to market forces can open a wide door to investors, with sometimes undesirable outcomes for fishermen, seafood companies, and consumers.

Tom Alspach, an attorney for Sea Watch International, Ltd., says four shareholders in that company were fishermen when the surf clam catch share got started. They pooled their quota behind the already active operation, becoming the largest processor of surf clam and ocean quahog quota in the region. But owning quota hasn’t enabled Sea Watch to thrive – it doesn’t always have enough, Alspach said. Estimating about 40 percent of the resource is held by people no longer active in the fishery, he said Sea Watch has paid an estimated $50 million to landlords to rent additional quota in the last decade during times of high demand, a figure that has reduced Sea Watch’s ability to expand and impacts prices for consumers.

“As existing fishermen who own allocation get older and retire, that number is only going to get bigger until you could eventually reach the point where basically the entire quota and the entire resource is controlled by people and companies that have absolutely nothing to do with the fishery. Yet you have to come back to them and pay them something for the right to fish,” he said.

Though the Mid-Atlantic Fishery Management Council keeps tabs on the various corporations that hold surf clam quota, no one knows who they represent, or whether the spoils of the $49 million fishery are spread among the roughly 60 corporations and individuals registered to own it, or ultimately land in the pockets of just a few. But the council has not focused on balancing the wealth of this fishery, instead promoting it’s economic efficiency. It’s always been fairly industrial, they reason. And council members – some of whom view the North Pacific councils’ style of worrying over fishery access for small boats, captains, and crews as a kind of social engineering – are more prone to let the free market rule while antitrust laws stand guard against price fixing.

Lee Anderson, an economist who serves as vice chair of the council, says that by avoiding the social tools that guarantee small boats and the young can fish, the council avoids cluttering surf clam and quahog with more boats and people than the fishery needs, a thing that keeps dollars efficient.

“No one’s ox is being gored to the extent that they are coming to the council” to complain, said Anderson. And true, there’s little social calamity. Many experts look at surf clam and see it as one of the most successful management stories in the nation. “It’s inexpensive to manage, it does what it’s supposed to do, and we don’t have to spend a lot of time on it,” said Anderson, who adds the council is able to concentrate instead on other fisheries with far more serious problems.

But even to the north, where there is little talk about anything but Atlantic cod at the New England Fishery Management Council, that council’s lack of focus on socioeconomic impacts for the catch share governing that fishery has riled fishermen to an extreme, making Gloucester a place where regulators can clash with fishermen, even on the street.

Much of that tension stems from declining cod stocks – a separate issue from catch shares. But the tension also stems from stories like that told by Busty Brancaleone, a fishermen for 45 years, whose tale is all to familiar on the docks of Cape Cod. Back when the cod fishing was governed – not by quota – but by the number of days at sea one had, Brancaleone borrowed $100,000 for two permits intended to give him more time in the water.

“I’m still paying for it, and it don’t do me no good,” he said.

Once the fishery converted to catch shares, those permits were worthless, though Brancaleone still owes $50,000 on the two. He never got the word about the impending change, the message lost in the distrust between beleaguered fishery managers and their stakeholders. The council’s failure to measure how previous investments in the old system might be upended by the catch share exacerbated already dramatic problems in New England, where cod was already in steep decline.

Shannon Eldredge, whose fishing family runs an offloading facility on Cape Cod, said such socioeconomic impacts are the least acknowledged part of the catch share and the root cause of its failings.

The New England Fishery Management Council “has been complicated, confusing, frustrating, not transparent at times, intimidating, and not a friendly place for fishermen to go and be heard,” she said. She describes the council membership as currently split between champions of the fishing community and agenda-oriented members who are representing either themselves, an area of industry, or environmental interests.

Brancaleone describes it this way: “You’re not equal in America anymore. You’ve got money, you get what you want.”

Investment Fishing
It’s clear that catch shares can and often do open a door for outside investors to shift wealth out of fisheries and away from people who fish, unless management controls are tight and the councils vigilantly steward them. As catch shares usher in an era where fishing needs more capital than ever, particularly for loans for quota purchasing, investors from the docks of Florida to the Silicon Valley are otherwise looking for, and often finding, a way in.

There is incredible potential for profit. Fishing always has been big business. Today, a permit just to fish in a limited access fishery like salmon, which is not a catch share, can cost $300,000. A commercial fishing boat can cost half a million dollars or more. But the value of the fisheries in catch shares has exploded with this policy transition, making them among the most lucrative of all. Five of the 15 ocean catch shares in the United States had a $315 million increase in value (65 percent) under the catch share system in the last two decades, rocketing from a combined value of $593 million to $908 million in worth.

And because quota enables fishermen to predict their annual returns, seafood — along with businesses and innovations in the seafood supply chain — is more attractive to the financial world than ever.

Evan Heriot, assistant vice president of Northwest Farm Credit Services in Seattle, is among the industry’s few traditional lenders. His $70 million commercial fishing portfolio, tended from an office in Fishermen’s Terminal in Seattle, is tied up in boats, quota, gear and other assets. He says his bank’s biggest competitive advantage is its knowledge base – he tracks regulations in 18 fisheries, a job broader than that of some fisheries’ lobbyists. But because the regulatory environment can bring unknown changes, and because quota values can fluctuate with the health of fish stocks, “You have really got to know what the heck you’re financing because it’s very easy to get yourself in trouble,” Heriot said.

For that reason, banks often steer clear, so that most of the financial actors in fishing aren’t typical. To date, many have been fishermen-friendly, government and grant-funded nonprofits intended to smooth the transition as more fisheries convert to catch shares, providing low-cost loans and access to quota at low rental rates.

That mix of financers does, however, appear headed for change, one that could continue the shift of wealth away from those who fish.

The Environmental Defense Fund, among the largest conservation supporters of catch shares and dubbed the most economically literate green campaigners by The Economist, is among those devising ways for private investors to bridge the capital gap in catch shares as the need for borrowing grows.

Trying on ideas, a trio of deeply knowledgeable catch share proponents spoke to an audience at the Milken Institute’s Global Conference in 2009, a place where market-minded financial innovators brainstorm. The speakers included David Festa, vice president of West Coast operations at the EDF and a former policy director in the U.S. Department of Commerce under President Clinton; Larry Band, a fisheries consultant for nonprofits; and Jason Winship, managing principal of the Sea Change Investment Fund, which makes environmentally driven investments in the seafood supply chain. Their compelling forecast of the potential rewards of catch share investments held the crowd, some past the session’s scheduled end.

Observing that the average value of catch-share fisheries had increased 400 percent after conversion, they theorized a portion of those profits could be extracted by investors willing to provide capital to accelerate transition of the $5 billion industry.

Fishermen are happy to give away the upside in the fishery, said Band, if the health of the fish stocks recovers through catch shares and their take doubles. “I think there’s all sorts of interesting agreements you could make with fishermen to take that upside if you just let them operate sustainably with their current take levels,” he told the crowd. He envisioned a handful of financial tools and innovations that could hasten the transition and also deliver returns.

So far, “green” or “good” investors are backing some of those concepts, in part proving their appeal four years later to investors that spy a trifecta of social, economic, and environmental dividends in seafood. Monica Jain of Manta Consulting, who recently organized a first-annual business competition called Fish 2.0 headquartered in California, hoped to net 10 to 15 such investors to advise and judge seafood-oriented businesses in November. She easily lured 85.
Catch shares are not necessarily part of the lure, said Jain, but they are a fit.

“Most of the people working with me have some interest in impact and they’re interested in seafood,” she said. “Most of them are not going to make a whole seafood portfolio, but what they’re doing is saying, ‘This could be part of my food systems portfolio or my community development portfolio or my poverty alleviation portfolio or my technology portfolio or something else.’ They are basically beginning to understand how ocean seafood and fisheries and aquaculture kind of fit in with their other existing portfolios.”

Shawn Watson is among investors who have learned how seafood fits in. A former track athlete with a history in the fitness industry, the 38-year-old sport fishermen started buying quota more than a year ago after learning some investment basics from business contacts at the gym. He placed his bets on grouper, the southeast restaurant favorite most often found in sandwiches on the state side of the Gulf of Mexico. He employs Florida-based captains to run two boats, occasionally fishing with them. And he makes significant returns.

“I can put all the money in the bank and get one percent, or I can put my money in fishing and get five to six,” or in a good season, ten, said Watson. He adds that every industry has investors and fishing, these days, is no different.

The investment is now half of his retirement plan. There’s another benefit: “I believe in the system,” he said, and its potential environmental rewards.
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Lee van der Voo is researching the new economics and inequities of modern fishing.